HON - AdvanSix: Stuck Here

2023-08-13 08:50:49 ET

Summary

• AdvanSix shares have been trading range bound in recent times.
• This comes after record 2022 results are not going to be replicated in 2023.
• Prevailing earnings power is reasonably solid, but there are few triggers on the horizon.

By mid-May, I believed that shares of AdvanSix ( ASIX ) were approaching interesting territory again. This came after shares shed about 20% in the time frame of just a quarter amidst uncertainty in the global economy, while the first quarter performance was quite reasonable.

Even though AdvanSix still is highly a commodity business, appeal started to emerge at prevailing prices and related to that valuations. With the first half of 2023 being rather difficult (amidst difficult comparables this period last year) and the expensive turnaround season on the horizon, I see modest appeal here. This means that I hold on to a modest position, as I see no convincing reason to add to, or sell, the shares here.

The Base Case

AdvanSix was spun off from its former parent company Honeywell ( HON ) back in 2016. The producer of ammonium sulfates, nylon and chemical intermediates typically operates in commodity markets, and while there is a strong correlation between input cost and output prices, that does not prevent the business from posting volatile margins.

Around the time of the spinoff, AdvanSix generated about $1.5 billion in sales and $200 million in EBITDA, with about a hundred million (or $3 per share) in earnings appearing on the bottom line. Based on these conditions, shares of AdvanSix started to trade around the $40 mark soon after the spinoff, but shares had already fallen to the $20 mark pre-pandemic.

This came as shares had seen quite some headwinds which included cyclicality, leverage, poor cash flow conversion (amidst large capital expenditure requirements, as well as increased focus on ESG), as well as general stagnation in the actual business.

The business fortunes changed in 2021 as sales rose to $1.7 billion, EBITDA topped the quarter of a billion mark and earnings were reported at $140 million, equal to $4.80 per share. Moreover, the company managed to reduce leverage significantly, with net debt down to $120 million at the time, as the company announced a $100 million deal for Amines at the time as well.

This recovery meant that shares ended 2021 in their forties. Shares peaked around $55 per share in spring 2022, to ever since largely trade in a $30-$40 range. This enthusiasm among investors was driven by earnings power advancing to more than $2 per share (per quarter) in the first half of 2022, although earnings fell to just $0.43 per share in the third quarter of 2022 (amidst turnaround of factories) and to $1.27 per share in the fourth quarter of last year.

All in all, 2020 sales rose to $1.95 billion on which $309 million in EBITDA and $172 million in net earnings were reported, as net debt was down to $85 million. The issue was that such numbers were not likely to be replicated in 2023, as well as the fact that capital spending of $110-$120 million was significantly higher than the depreciation charges.

2023 - Mixed So Far

The situation above stood at the basis of a decline from $43 per share in February towards $34 in May, amidst uncertainty on the global economy being on the increase. Part of this was seen in the first quarter results, with sales down by 16% to $401 million, driven by a 9 point decline in volumes.

That said, the company produced $65 million in EBITDA and posted adjusted earnings at $1.30 per share, while net debt ticked up to $100 million amidst poor working capital conversion. The company did not provide a full year guidance, but reconfirmed the capital spending guidance and announced a union deal for the Hopewell site as well early in May.

Pegging earnings power at $4-$5 per share, I fancied a small position in the shares in the low thirties, fully recognizing that the set-up was not ideal for long tern value creation. In the end, I have initiated very small at $33, as I was looking to average down further, but shares turned higher.

A Mixed Second Quarter

Early in August, AdvanSix announced mixed second quarter results which were down 27% to $428 million, although volumes were down just 2%. Adjusted EBITDA was quite steady (on a sequential basis) at $66 million, with adjusted earnings coming in at $1.25 per share, as the slight decline in earnings per share was largely due to some incremental interest expenses.

Capital spending so far this year came in at $44 million, which only slightly surpassed the $36 million depreciation charge for the same period, indicating that capital spending is largely back loaded this year. In fact, this is likely to happen for the majority within the third quarter, when many turnaround activities are set to take place. Net debt already ticked up to $130 million, due to share buybacks, as well as a 10% increase in the quarterly dividend to $0.16 per share.

With the turnarounds impacting the business in a major way in the third quarter, with full year costs seen at $28-$33 million (pre-tax), that suggests a near $1 per share after-tax headwind, which makes a $4 earnings per share number for the year quite reasonable.

With shares trading at $40 ahead of the second quarter earnings release, they have settled down at $37 here as there were few immediate triggers in the quarterly earnings report. This leaves me sitting with a modest position here, as I see no reason to add or sell-out of the position at prevailing levels.

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